The Crisis Of 2008 : Is It All The Feds Fault?

Our economy is a machine that is ran by humans. A machine can only be as good as the person who makes it. This makes our economy susceptible to human error. A couple years ago the United States faced one of the greatest financial crisis since the Great Depression, which was the Great Recession. The Great Recession was a severe economic downturn that occurred in 2008 following the burst of the housing market. The government tried passing bills to see if anything would help it from becoming another Great Depression. Trying to aid the government was the Federal Reserve. The Federal Reserve went through a couple strategies in order to help the economy recover. The Federal Reserve provided three major strategies to start moving the economy in a better direction. The first strategy was primarily focused on the central bank’s role of the lender of last resort. The second strategy was meant to provide provision of liquidity directly to borrowers and investors in key credit markets. The last strategy was for the Federal Reserve to expand its open market operations to support the credit markets still working, as well as trying to push long term interest rates down. Since time has passed on since the Great Recession it has been a long road. In this essay we will take a time to reflect on these strategies to see how they helped.

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

The last time the Fed raised interest rates (to 5.25%) was in 2006. This move was soon reversed as the 8 trillion dollar housing market bust sparked the global financial crises. About 8.7 million jobs (about 6%) were lost, unemployment rose to about 10% nationally leaving many households with less to spend and higher debt.

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

I chose to do House of Cards because I felt like it gave me, albeit a little dramatically, a nice overview of everything that happened in 2008. Not being old enough to remember what happened, I decided that instead od focusing on a more micro topic, I would choose one that gave me a broad view to educate myself more on everything that caused the crash, and how we can, at least try, to prevent it in the future.

However, these mortgages required no income verification, or resources to pay for the mortgage, as long as they signed the mortgage papers. Fanny Mae and Freddie Mac were the lending arms that provided the money. Both are now government run, but formerly were privately held companies, unlike Ginnie Mae, which is fully backed by the government. When the homeowners could no longer pay their mortgages, the house of cards collapsed. With the lack of education in this country, the middle and lower class were greatly affected by the government’s intervention in Mortgage rates. The subprime mortgage crisis can be blamed for much of this country’s economic problems, but we don’t need to point fingers at what went wrong, we need to address the problems and find solutions.

The financial crisis emerged because of an excessive deregulation of business operation of financial institutions and of abusing the securitization mechanism in the absence of clearly defined rules to regulate this area in the American mortgage market (Krstić, Jemović, & Radojičić, 2013). Deregulation gives larger banks the opportunity to loosen underwriting lender guidelines and generate increase opportunity for homeownership (Kroszner & Strahan, 2013). After deregulation, banks utilized many versions of mortgage loans. Mortgage loans such as subprime and Alternative-A paper loans became available for borrowers challenged to find mortgage lenders before deregulation (Elbarouki, 2016; Palmer, 2015). The housing market has been severely affected by fluctuating interest rates and the requirement of large down payment (Follain, & Giertz, 2013). The subprime lending crisis has taken a toll on the nation’s economy since 2007. Individuals who lacked sufficient credit ratings or down payments resorted to subprime mortgages to finance their homes Defaults on subprime and other mortgages precipitated the foreclosure crisis, which contributed to the recent recession and national financial crisis (Odetunde, 2015). Subprime mortgages were appropriate for borrowers with substandard credit and Alternate-A paper loans were

As we go into our research on the financial crisis of 2007, we will try to answer some questions about what actually cause of the failure of our financial system, which almost collapse the dollar. While there are plenty of faults to go around on what cause this crisis, there was never a clear path on how to reverse the demand that was cause by repealing the Glass-Steagall Act of 1933. Although there has been other regulations and acts pass since the repeal of the Act of 1933, the ability to restore and strength our dollar has been an uphill battle to take control of it. What was known within our economic system to readjust and rebuilt

Ultimately these lenders mortgages to people with poor credit and a high risk to default. Lenders were willing to make give out these subprime mortgages for countless reasons. Firstly these lenders had large amounts of funds to lend because strong economy leading up to recession. With this abundant capital lenders were willing to make riskier loans to help increase their investment returns. Lenders also thought these subprime mortgages were less risky than usual because rates were low, the economy was healthy and in general individuals were making their payments. The amount of subprime mortgages went from 173 billion in 2001 to 665 billion in 2005. A second reason for why lenders were giving out these subprime loans is due to personal greed and selfishness. Many heads of banks made huge bonuses based on high volumes and fraudulent appraisals. One way these lenders were able to do more volume was through mortgage fraud for profit. Mortgage fraud for profit is a illegal practice committed by industry professional who misrepresent or omit important information about their client’s employment, income, credit or property value with the goal of maximizing their own profits. The FBI found 63,713 cases of mortgage fraud during the year of 2008 alone and 46,717 during the year of 2007. They found out that in many low-credit, low income ZIP codes buyer income was overstated

The issue with the housing market began around the year 2000. This was also known as the start of the Real Estate Boom. Banks started to handout subprime loans, also known as junk loans with super high interest rates (Lewis). Normally, lower income families would not be able to receive

But they didn 't really look at the underlying mortgages, either. They relied on rating agencies, and they didn 't really look at the underlying mortgages. They just relied on mathematical models and say: "Oh, well, it 's overcollateralized by 30 percent. My gosh, we couldn 't have 30 percent of the mortgages going bad here, so we 're going to give it a AAA rating." So nobody really looked at the human faces behind these mortgages to see if they were actually affordable and sustainable.

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been

  Contrary to popular belief among some financial analysts, the mortgage crisis of 2008 may have occurred with or without the existence of subprime mortgages. According to the U.S. Census Bureau, 1744 at their peak rose to just over 20% of all home mortgages originated, of which 35% defaulted. Subprime mortgage defaults accounted for approximately 7% of mortgage originated s at their peak. The cumulative defaults of conventional mortgages from vintage pools of 2007 were over 13%, surpassing subprime default rates (see Figure V, Fannie Mae 2013). The credit characteristics of Fannie Mae and Freddie Mac mortgage pools originated between the years 2001-2007 were virtually the same, however

As mentioned, the Federal Reserve allowed the housing bubble to occur and promoted low interest rates, relaxed and accessible credit and limited regulations.